Question

Microeconomics

Posted 3 months ago

```
Prairie Glen and Mountain View sell flavored fizzy water in a market where they are the only two sellers. Each is considering what actions to undertake in the following week. The payoff matrix shown here shows each firm's daily profits for each combination of actions. The first entry represents Prarie Glen's payoff and the second entry represents Mountain View's payoff.
Mountain View
advertise don't advertise
Prarie
price high
\begin{tabular}{|l|l|}
\hline$\$ 1000, \$ 1000$ & $\$ 2500, \$ 500$ \\
\hline$\$ 500, \$ 2500$ & $\$ 2000, \$ 2000$ \\
\hline
\end{tabular}
A Nash equilibrium exists when
Choose 1 answer:
A) Prairie Glen prices low and Mountain View doesn't advertise
(B) Prairie Glen prices low and Mountain View advertises
(C) Prairie Glen prices high and Mountain View advertises
(D) there's no Nash equilibrium in this game
(E) Prairie Glen prices high and Mountain View doesn't advertise
Related content
Game theory worked example from AP Microeconomics
Report a problem
```

Sign in to unlock the answer

Answer from Sia

Posted 3 months ago

Solution

a

Definition of Nash Equilibrium: A Nash equilibrium occurs when each player in a game chooses the best strategy given the strategies chosen by the other players, and no player can benefit by changing their strategy unilaterally

b

Identifying Nash Equilibrium: To find the Nash equilibrium, we need to check each combination of strategies to see if any player can improve their payoff by changing their strategy while the other player's strategy remains unchanged

c

Analysis of Payoff Matrix:
- If Prairie Glen prices high and Mountain View advertises, the payoffs are $1000,$1000. If Prairie Glen changes to pricing low, its payoff becomes $500, which is worse. If Mountain View changes to not advertising, its payoff becomes$500, which is also worse.
- If Prairie Glen prices high and Mountain View doesn't advertise, the payoffs are $2500,$500. If Prairie Glen changes to pricing low, its payoff becomes $2000, which is worse. If Mountain View changes to advertising, its payoff becomes$1000, which is better.
- If Prairie Glen prices low and Mountain View advertises, the payoffs are $500,$2500. If Prairie Glen changes to pricing high, its payoff becomes $1000, which is better. If Mountain View changes to not advertising, its payoff becomes$2000, which is worse.
- If Prairie Glen prices low and Mountain View doesn't advertise, the payoffs are $2000,$2000. If Prairie Glen changes to pricing high, its payoff becomes $2500, which is better. If Mountain View changes to advertising, its payoff becomes$500, which is worse

d

Conclusion: The combination where Prairie Glen prices low and Mountain View doesn't advertise ($2000,$2000) is the Nash equilibrium because neither player can improve their payoff by unilaterally changing their strategy

Answer

Prairie Glen prices low and Mountain View doesn't advertise

Key Concept

Nash Equilibrium

Explanation

A Nash equilibrium is a situation where no player can benefit by changing their strategy while the other player's strategy remains unchanged. In this game, the combination where Prairie Glen prices low and Mountain View doesn't advertise is the Nash equilibrium because neither firm can improve their payoff by changing their strategy unilaterally.

Not the question you are looking for? Ask here!

Enter question by text

Enter question by image

Upgrade to Asksia Pro

Join a AskSia's Pro Plan, and get 24/7 AI tutoring for your reviews, assignments, quizzes and exam preps.

Unlimited chat query usages

Strong algorithms that better know you

Early access to new release features

Study Other Question